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SNC Lavalin risks a share price free-fall: the cost of doing business in Libya

The Canadian engineering firm SNC-Lavalin, one of the world’s largest, has suffered considerable damage to its reputation over some of its dealings in Libya, involving the family of the former dictator Mu’ammar al-Qadhafi. The fact that news of these affairs has come just as the Company is celebrating its centenary has made the damage all the more visible. In fairness, inasmuch as the case involves specific Company managers and dealings, the SNC case serves as a reminder of the significant risks to corporate social responsibility faced by businesses in their effort to secure contracts in many developing countries. SNC’s experience is by no means unique; it was caught with its hands in Qadhafi’s cookie jar, however, and now has to pay the price for being caught.

The very circumstances of the way the SNC scandal came to public attention are rooted in the kinds of risks that nobody can foresee, the events that the iconoclastic student of probability Nicholas Nassim Taleb has famously called ‘Black Swans’, against which no amount of planning or insight offers adequate insurance. The 9/11 terrorist attacks represent a classic case of Black Swan; only those who perpetrated the attack had knowledge of it and everyone in the vicinity of Wall Street and the Pentagon on that fateful September morning was totally oblivious to the tremendous risks they were running through the mere act of having showed up to work on time.

Investors around the world also faced unprecedented risks on that day – risks that their financial managers, analysts, gurus, even those as good as George Soros or Warren Buffett could have possibly expected. The ‘Black Swan’ arrived at SNC headquarters in the form of the Libyan revolt. Suddenly, the famous Company, one of Canada’s largest and finest, promoting Canadian technical expertise worldwide in projects, often having a significant humanitarian value in developing countries, was faced with very difficult decisions. SNC had worked in Libya for many years, earning the trust of its various contractors and, crucially, the government in the form of Qadhafi himself. In the areas targeted by SNC, large infrastructure, water supply systems, special buildings, even a prison, the Montreal based Company had little choice but to deal with Qadhafi and his closest family members, his sons; in Qadhafi’s Libya, much as in Mario Puzo’s ‘The Godfather’, there was only one family that counted. SNC’s contracts in Libya were worth close to a billion dollars after a 25 year long presence in the country – which nobody ever questioned (and in fairness any related accusations about its business – if not some of its methods – involvement there are rather hypocritical).

All moral questions aside, SNC’s management could not simply pack up and leave, once the sudden revolts-in the wake of events in Egypt and Tunisia in early 2011-began in the now infamous city of Benghazi. In legal and technical terms, SNC’s responsibility was to its investors and employees and half a billion dollars is a considerable sum, one surely to affect the Company’s bottom line. Before, dispensing any judgment, it is important to analyze the situation from the CEO’s perspective. Those who are truly honest will agree that they would have taken a similar course. The first move, in a mixture of denial and damage control, would surely have been to stay the course, hoping that the Arab World and Africa’s longest lasting regime would overcome the revolt and re-establish control. The first weeks of Libya’s revolt took the whole world by surprise-the fact that they lasted and ultimately toppled the regime would have been considered science fiction mere months before, when it seemed that the enterprising British educated Saif ul-Islam Qadhafi was playing an ever more influential and moderating role in Tripoli, preparing the regime for a Libyan equivalent of Perestroika. The question remains, then, what could SNC have done to prevent getting dragged in to the bribing affair, how could it have acted in a more ‘sustainable’ manner from the perspective of corporate social responsibility?

Key senior executives have already lost their jobs as the company is going through damage control, and construction contracts in other parts of the world are being questioned.

Today, the company risks a share price free-fall in light of an accounting probe, as the press continues to dig deep into corporate dealings that have gone bad like a Hollywood movie plot. The cost of doing business in Libya has come back to bite SNC in the back. Perhaps, then, the lesson is that inasmuch as the value of a project may be too big, the potential fallout from avoiding short or medium term pain could evolve into long term or chronic damage; this is because SNC’s troubles may have not even reached a simmer yet. SNC decided to stay the course in Libya when others had started to pull out; it was this decision that triggered the present legal investigation.

SNC did actually close up shop in Libya; however, it continued to do business through surreptitious operators, who became embroiled in having to save their associates in the regime, who may or may not have given the Company advantages in securing contracts. More than a year after the collapse of the Qadhafis, and SNC is still facing scrutiny over its ties to the former dictatorship. SNC hired a consultant, Cynthia Vanier, generally specialized in land dispute resolutions, to do the work of CIA and FBI types, to apparently help members of Qadhafi’s family and close associates escape from Libya. The fact that a corporation such as SNC would resort to special consultants in high risk areas is not in itself unusual or even unethical; many companies hire crisis management firms to soften the impact of bad news and no analyst or law enforcement official would budge.

The problem in Libya was that SNC and its consultant were dealing directly with one of the most famous, or infamous, families in the world-about as easy to hide as the elephant in the room. The Vanier report, for which she was paid a considerable sum, predictably praised the Qadhafi regime. Vanier would pay for the flattery by being arrested in Mexico, as the NATO bombardments over Tripoli intensified, for her involvement in an attempt to smuggle Saadi al-Qadhafi – who just happened to be one of the most visible and well known dictatorial offspring in the world.

The arrest led to a whole series of details uncovered by the media, including the discovery of SNC’s prison contract: “Libya’s first detention center in that nation to conform to international standards on human rights.” Human Rights in the Libyan Jamahiriya indeed. SNC also formed a joint venture with Libya’s military corps of engineers, involved in various projects, including a highway. SNC does have a Code of Ethics and Business Conduct, a rather comprehensive one in fact. The investigation is now focusing on the role played by Riadh Ben Aissa, who managed SNC’s affairs from Tunis. He is suspected of having been aware, or actually involved, in the operation that led Saadi Qadhafi to safety, crossing the Libyan border into Niger. Now it has to find special routes to recover investor confidence. The developing world is replete with countries needing infrastructure and special projects from road building, power generation or mining and oil extraction; many of these countries are also run by dictators or ‘democratically’ elected governments with dubious democratic credentials. Does this mean that Companies should not get involved in those countries? Absolutely not.

It would be unethical and impractical to impose such sweeping restrictions. That said, companies who do choose to operate in risky regions must take precautions to avoid becoming too cozy, which inevitably links a company’s fate to that of the regime; and if there is a lesson to be learned from the so-called ‘Arab Spring’ it is that even the most solid of regimes collapse-always.

The current financial crisis has given way to the State, including its institutions, resuming its role in regulating economies. For global institutional investors seeking to manage portfolio risk, political risk now deserves more of their attention as governments have been called to intervene much more directly in the economies of rich and poor countries. Multinational corporations interested in investing in emerging markets inevitably consider the basic variables that form what is known as country or sovereign risk in order to assess the viability of doing business in a developing country. Such risks include analysis of foreign currency, government budgets, macroeconomic statistics, debt ratios, and other quantifiable factors. Especially in emerging markets, however, all the quantitative data simply frame a very colorful picture comprising many dynamics, the aspects that former US Secretary of Defense Donald Rumsfeld described as “the known unknowns”, a term that actually makes more sense than it should. Political risk, as SNC found out, can be especially ‘risky’ when it comes in the form of leadership succession struggle. For the investors in SNC Lavalin, who have taken a hit, political risk factors are inversely proportionate to investors’ knowledge about a country, which depends heavily on transparency by the nation under consideration. Companies and institutional investors intending to invest for the long run should do their best to assess these frequently.

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